Supreme Court Clarifies Insolvency and Bankruptcy Code on Operational Debt and Demand Notices

The Supreme Court of India, in its landmark judgment in the case of Macquarie Bank Limited v. Shilpi Cable Technologies Ltd., addressed significant questions concerning the application of the Insolvency and Bankruptcy Code, 2016 (IBC). The judgment clarified the mandatory nature of Section 9(3)(c) and whether an advocate can issue a demand notice under Section 8 on behalf of an operational creditor. The case carries far-reaching implications for insolvency proceedings in India, impacting the rights of operational creditors and corporate debtors.

Background of the Case

The dispute arose when Macquarie Bank Limited, an operational creditor, filed an insolvency application against Shilpi Cable Technologies Ltd. The petition was filed under Section 9 of the IBC, alleging non-payment of dues. However, the National Company Law Tribunal (NCLT) rejected the petition, citing non-compliance with Section 9(3)(c), which requires a certificate from a financial institution. The NCLT also ruled that the demand notice under Section 8 was issued by an advocate, which was deemed invalid.

The matter was then taken up by the National Company Law Appellate Tribunal (NCLAT), which upheld the NCLT’s decision. Dissatisfied with the ruling, Macquarie Bank Limited appealed to the Supreme Court, seeking clarity on these critical legal issues.

Key Legal Issues

The case revolved around two major questions:

• Whether a certificate from a financial institution, as required under Section 9(3)(c) of the IBC, is a mandatory requirement for initiating insolvency proceedings.
• Whether a demand notice under Section 8 can be issued by an advocate on behalf of an operational creditor.

Petitioner’s (Macquarie Bank Limited) Arguments

Macquarie Bank, represented by senior counsel, argued the following:

• The requirement under Section 9(3)(c) should be interpreted as directory and not mandatory. The provision merely seeks to facilitate the verification of debt but should not act as an absolute precondition for insolvency proceedings.
• Operational creditors often do not maintain accounts with financial institutions recognized under the IBC, making compliance with Section 9(3)(c) impractical in many cases.
• The IBC does not prohibit advocates from issuing demand notices on behalf of operational creditors. The term “delivery” under Section 8 does not necessarily mean personal delivery by the creditor.
• Forms 3 and 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, permit an “authorized representative,” which includes legal counsel, to issue demand notices.

Respondent’s (Shilpi Cable Technologies Ltd.) Arguments

The respondent, Shilpi Cable Technologies Ltd., opposed the appeal, presenting the following counterarguments:

• The certificate under Section 9(3)(c) is mandatory, as the IBC mandates strict compliance with procedural requirements before allowing insolvency proceedings.
• Allowing demand notices to be issued by advocates would weaken the legal framework governing insolvency proceedings and increase frivolous claims.
• The use of an advocate for issuing demand notices was not contemplated under the IBC, and doing so would open the floodgates for indiscriminate insolvency applications.
• Since the petitioner had failed to produce the required financial institution certificate, the insolvency petition was correctly rejected by the lower courts.

Supreme Court’s Observations

The Supreme Court bench, comprising Justice R.F. Nariman and Justice Navin Sinha, delivered a crucial judgment that balanced the interests of operational creditors while ensuring procedural integrity in insolvency proceedings.

On the Requirement of Section 9(3)(c)

“The necessity for such a certificate has been held to be directory in nature. If an operational creditor can establish a default through other documentary evidence, the absence of a certificate under Section 9(3)(c) will not be fatal to the application.”

The Court held that the provision should be read as a procedural requirement rather than a substantive one. The Court reasoned that strict compliance with Section 9(3)(c) would create unnecessary hurdles for genuine creditors and defeat the purpose of the IBC.

On Whether an Advocate Can Issue a Demand Notice

“A lawyer, duly authorized by the operational creditor, is competent to issue a demand notice under Section 8. The term ‘delivery’ does not restrict the issuance of notice only by the operational creditor.”

The Court ruled in favor of the petitioner, affirming that an advocate, if authorized, can issue demand notices under the IBC. The judgment pointed out that this interpretation aligns with the legislative intent of ensuring quick resolution of insolvency disputes.

Final Judgment

The Supreme Court ruled as follows:

• Set aside the NCLAT’s ruling that mandated strict compliance with Section 9(3)(c).
• Declared that operational creditors can submit alternative documentary proof to establish the existence of debt.
• Held that demand notices under Section 8 can be issued by an advocate on behalf of an operational creditor.
• Directed that the matter be reconsidered by the NCLT in light of these clarifications.

Impact of the Judgment

This landmark ruling has far-reaching implications for insolvency law in India:

1. Eases Compliance for Operational Creditors

By declaring Section 9(3)(c) as directory, the Court has made it easier for operational creditors to file insolvency petitions without facing technical rejections.

2. Strengthens the Role of Legal Representation

The ruling allows advocates to issue demand notices under Section 8, streamlining the insolvency initiation process and reducing procedural bottlenecks.

3. Ensures Procedural Fairness

The Court’s interpretation prevents unnecessary procedural hurdles while maintaining the integrity of the IBC framework.

4. Encourages Efficient Debt Resolution

By allowing alternative forms of proof instead of mandatory financial institution certificates, the judgment facilitates quicker resolution of insolvency claims.

The Supreme Court’s decision reinforces the purpose of the IBC—to provide a swift and effective resolution mechanism for insolvency while ensuring fairness for both creditors and debtors.

Don’t miss out on the full details! Download the complete judgment in PDF format below and gain valuable insights instantly!

Download Judgment: Macquarie Bank Limit vs Shilpi Cable Technol Supreme Court of India Judgment Dated 15-12-2017.pdf

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